Is the FairTax just another way of having unlimited IRAs ?

The merits and demerits of the Huckabee tax plan are identical to the merits and demerits of a vastly liberalized IRA policy.

I say no. I would favor substantial expansions of IRAs, but do not favor the FairTax. The basic problems with the FairTax, I think, were accurately summed up by Bruce Bartlett . Quick summary of Bartlett's most important argument: even once you throw out the many exaggerated/misleading claims that the FairTaxers make, if you want to tax consumption, it should be done as a VAT rather than a retail sales tax.

Some observations:

1. IRAs don't reduce your payroll tax, nor do you pay payroll tax when you withdraw the money. In an unlimited-IRA world, payroll taxes would always still be paid at the point where the income is earned, not when it is spent. The FairTax, on the other hand, proposes to eliminate payroll taxes. (Oddly enough, 401k's, as opposed to IRAs, allow you to reduce your payroll tax now *and* not pay payroll taxes when you take distributions! This is probably not what we want.)

2. At least this article freely admits that "tax rates must be higher" under an unlimited IRA system. The FairTax folks are in denial when they think their 23% rate will be enough. Of course, better yet would be to pay for the unlimited IRAs with either (A) spending cuts or (B) elimination of unjustifiable deductions/credits (e.g. eliminate the deduction for state and local taxes), but back in reality...

3. The FairTax includes the "prebate." Unlimited IRAs don't. Since the prebate is yet another welfare program and would almost certainly become subject to all sorts of new abuses, this would be a good reason to favor unlimited IRAs over the FairTax.

4. Whereas the FairTax creates a brand new set of difficult tax enforcement problems, IRAs may actually *help* with enforcement, since IRA contributions and distributions are reported to the IRS by your IRA provider. It would be nearly impossible to avoid paying taxes on your distributions, and suspiciously high contributions would be a sign you're not reporting all your income. To put it another way: a drug dealer who takes only cash income and doesn't report it to the IRS would be unable to take advantage of the unlimited IRAs, because their IRA contributions would mysteriously be many times higher than their reported income, which would rapidly flag an audit.

5. Unlimited IRAs could be phased in gradually, and in a way that's fair (no double taxation) to people who've been responsible and saved their money previously. The FairTax has massive transition problems, even aside from the need to amend the Constitution. For unlimited IRAs, the transition could be as simple as: repeal the income limit on deductibility of traditional IRA contributions immediately, and then increase the limit on contributions 10%-plus-inflation each year until the contribution limit rapidly becomes irrelevant (at which point it too can be repealed).